Fed Faces Calls for Radical Reform

A senior Republican congressman wants to appoint a bipartisan commission that could mean a radical change in the mandate of the Federal Reserve. The bill is one of the most serious attempts to revamp the Fed for years.

Source: Financial Times

A senior Republican congressman has called for everything from the gold standard to a price level target to be on the table in a 100th anniversary review of the Federal Reserve’s mandate.

Kevin Brady, who chairs the joint economic committee, wants Congress to appoint a bipartisan commission that could lead to a radical change in the mandate of the world’s largest and most important central bank.

By setting up a process that has a chance of passing Congress, Mr. Brady’s bill marks one of the most serious attempts to revamp the Fed for years, on the centenary of its founding legislation in 1913.

“This isn’t an ‘End the Fed’ gambit - just the opposite,” Mr. Brady told the Financial Times in an interview. “We want a very thoughtful, very constructive analysis of the last 100 years. When the house isn’t on fire we want a discussion of what role the fire department should play.”

The proposed Centennial Monetary Commission would have instructions to look at more aggressive mandates to fight unemployment, such as a target level for nominal gross domestic product, as well as more conservative regimes such as an inflation-only objective.

That could make the idea acceptable to Democrats. Previous Republican proposals, such as ex-presidential candidate Ron Paul’s demand to “audit” the Fed and Mr. Brady’s own bill to give the Fed an inflation-only mandate, have won only partisan support.

Mr. Brady and other Republicans worry that the Fed’s aggressive programme of asset purchases, carried out to meet its current dual mandate of maximum employment and stable prices, could lead to inflation or financial stability problems in the future.

But some Democrats would like to see the Fed do more to tackle an unemployment rate that is still high, at 7.6 per cent, almost four years after the end of a recession.

There has also been a broad global move to look again at central bank mandates. The Bank of England and the Bank of Japan have made recent changes.

Mr. Brady said that initial reaction to his proposal had been positive because the crisis had given the Fed a higher profile than ever. “Both lawmakers in Washington and the public are now genuinely interested in who the Fed is, what they do and how they are given the authority to do it,” he said.

So far his bill has 12 co-sponsors, all of them Republicans in the House, and to make progress it will have to attract Democratic support and interest from the Senate.

Mr. Brady is proposing a commission of six Democrats and six Republicans, half of them legislators and half of them appointees. The Fed and the Treasury would each appoint one non-voting member. Congress would still have to vote on anything a commission proposed.

“We think - because it is so balanced and sets up a bipartisan composition - we think we can draw support,” said Mr. Brady. “We’re just starting that process and that outreach.”

Mr. Brady is trying to attract support for his commission in a year when a new chairman is likely to be nominated to the Fed if Ben Bernanke steps down when his current term ends next January.

That would mean a Senate confirmation process in the autumn, with a new chairman setting out their views of the role of the Fed. If Mr. Brady’s bill gains traction then it could be drawn into that debate.

“That would not be the intent,” said Mr. Brady. “We would want the commission to be set aside so it has that objectivity.” If the president’s nominee for Fed chairman proves to be controversial, however, it could boost a proposal to examine the institution more broadly.

Officials at the Fed tend to argue that policy would be quite similar under an inflation-only mandate, because with unemployment so high there is little upward pressure on prices.

(c) 2013 The Financial Times Limited